Derivatives are Collapsing the Financial System
Soon derivatives will have a big affect on just about everyone on the planet. For now, Derivatives are collapsing the Financial System from within. Soon, those ripple effects will be seen everywhere. We just wish we knew what the definition of “soon” was. We started this topic yesterday which you can read here. Today, we’ll give you a little more evidence of what we’re talking about and perhaps you can decide for yourself if this is real in the first place, and if so, when will the last shoe drop?
AIG, MF Global, PFG Best, UBS’s “Rogue Trader”, JP Morgan’s “London Whale”, & the LIBOR scandal have all been recent financial news stories. Do you think these are each independent events, or could they be all connected? What do all of these events have in common?
1) AIG – You may not remember as four years seems like an eternity ago, but right in the heart of the 2008 financial crises was AIG. You might ask yourself, why would a stodgy old insurance company be in the center of the financial universe? Well, this wasn’t your friendly neighborhood mutual insurance company. AIG was a publicly traded stock company and they got a little bored with insurance, so they got into the financial insurance business. There’s much bigger bonuses to be had there! They began insuring mortgage backed securities (a derivative security based on a bundle of mortgages).
The only problem is they didn’t really put any capital down for losses. (This is going to be true pretty much across the list we’re about to give you, no money is set aside to pay for potential losses, and the market has grown so big, there isn’t enough money in all the world to cover these losses should they come!)
The big banks all felt free to take on excessive risk because these assets were insured! And Triple AAA! And besides, everyone knows that real estate never goes down! So they did, and when the market turned and they started facing losses, they turned to AIG. The only problem is that while AIG had enjoyed some lovely years of bonuses for their finest derivative manufacturing broker’s, they didn’t actually have the money to cover the losses. So the system was going under. The US government had to step in and save them.
That’s good, right? We didn’t want to go under, did we?
Here’s the thing, what did these Wall Street guys learn from the bailouts? They learned that if you make hay when the sun is shining and earn huge bonuses while building an unsustainable tower of derivatives, then you can be really fat and happy on your yacht. And that when it all comes crashing down, someone else will pay to get you out of the mess! It’s a great job if you can get it!
But now, these monstrous banks are much bigger than they were, and now the governments who bailed them out before are choking with much larger debts. So the problem is bigger and the savior is broke. I guess we’re going to need another savior, aren’t we? Unfortunately, most of the world will think that means a bigger stronger government rather than the Truth. So AIG was a warning sign, but instead of dealing with it properly, we simply let the problem build much, much bigger.
2) MF Global – We discussed that situation here. MF Global was a futures (derivative) broker. That should be a honest, simple, and benign business that provides an important service. But John Corzine decided to take his client’s money and gamble it away on European sovereign debt derivatives. His bet went wrong and many people had their assets stolen from them. It’s reported that JP Morgan Chase managed to get a lot of this money right before MF Global went under which is very convenient if you’re them.
3) PFG Best (Peregrine) – has recent been going through an almost identical situation. Again, JP Morgan Chase has been accused of walking away with a lot of PFG’s clients money.
4) UBS’s Rogue Trader – was news about a year ago when he supposedly “went rogue” and lost $2 Billion. Is it more likely that he “went rogue” or that he was took the fall for company’s oversized and misplaced gamble? It’s a lot easier to claim an employee didn’t play by the rules than it is to explain that the company is taking on enormous risks with shareholder equity.
5) JP Morgan’s “London Whale” – has been more recent news in a very similar scandal. It seems clear to us that the company had taken on a massive risk position that went against them. When you’re the biggest player in the market, you can bully other market participants around for a while, but eventually, you find yourself with a bloated position that can no longer be defended and must be unwound.
6) The LIBOR scandal – has recently been top of the news scandal. Barclays admitted wrong doing. Britain, the US, & probably all 15 of the other participants are guilty in this fraud and manipulation too. It’s impossible for Barclays to rig the Libor. There would be no point in it. You have to have at least 5 banks collaborating to make a dent and if you don’t have most or all of them in on it, then it still wouldn’t be particularly affective. It’s ridiculous for the Fed to claim that they were innocent of the whole affair. The rig rates every day as a regular part of doing business. The benefit from the LIBOR being low. It would not work too well for the Fed to try to rig its own rates low if LIBOR were skyrocketing. It’s not believable that the Fed wasn’t fully aware and either partially or fully complicit. More proof shows up when you examine the fact that they continued to use the rate even after they informed Britain that the rate might be compromised.
What we see here is the system fraying apart. All of these items are interconnected and the seams are busting one at a time. The LIBOR scandal is big enough (since hundreds of trillions of dollars of commerce are based on it) that it could bring down the system by itself.
If not, LIBOR, the Credit Default Swaps could destroy all big banks when a sovereign nation goes under. These CDS derivative contracts are insurance that pays off if a bond defaults. But like AIG, there is no backing for these derivatives.
One derivative scandal after another will erupt until some important lynchpin takes down everything. It’s impossible to know at this point whether the governments will let these huge banks go under or whether they will print trillions to hundreds of trillions more to nominally save them. But either way, the consequences are ugly.
Fortunately, the Lord is doing a very deep cleaning and bringing these things about for a reason. These are indeed the best times to be alive! Seek first His Kingdom and everything else shall be yours. Get caught up in (focused on) the economic turmoil and you’ll be ruined.
If you’d like to talk about what can be done to help you prepare for these times, drop us a line at the contact us button above.
This is the 32nd post in a series. You should read the initial thoughts on these forecasts here. and the Overall Prediction Page here. Here are the rest of the posts: 3) Ben Bernanke’s Dollar Devaluation Plan, 4) The Coming US Dollar Devaluation, 5) Stock Market Volatility, & 6) Stocks to Fall in 2012, 7) The European Crises, European Options, 9) European Prediction, 10) Recession in Japan, 11) Japanese Yen Crash, 12) War with Iran, 13) Jewish Perspective on Iran, 14) Commodities to End 2012 Lower, 15) Where Will Gold Go Next?, 16) Gold, Should you Wait?, 17) Will Silver Move Higher?, 18) Why Buy Silver Now?, 19) Oil Prices to Explode Higher, 20) Bonds Will Fall, 21) US Dollar, 22) European Recession, 23) Sovereign Default in Europe, 24) China’s Slowing, 25) US Recession., 26) Currency War, 27) Deflationary Crash, 28) Hyperinflation, 29) Increasing Natural Disasters, 30) Fed Announces New Form QE, & 31) Derivatives Pt 1.
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